Premium – Turboprop Update

It has been some time since we last looked at the airline passenger turboprop market. Here is an update of what we know about this market. Aircraft size is growing, as in other segments There appears to be 20 years of replacement production List price should not be the key issue driving fleet decisions There are essentially two OEMs in the business, ATR and Bombardier. But turboprop aircraft have long lives – there are many aircraft from Embraer, SAAB, Dornier, BAe and Fokker still flying. The first chart illustrates this for passenger aircraft. As the following chart demonstrates, the aircraft age well. They have long service lives despite high cycles. Clearly, the opportunity for ATR and Bombardier is to replace the aging models from those OEMs which have left the industry. The first area of focus is the fleet from the OEMs that have left the industry. The following table lays out the active turboprop models from these OEMs. There are 488 aircraft that need to be replaced. The largest of these is the ATP with 64 seats, and the Fokker and SAAB 2000, typically seating 50. ATR could benefit from having an aircraft of the similar seat capacity to many of these aging aircraft. However, such linear thinking ignores a consistent industry trend. The data shows that turboprops are following the same trend as jets – they are growing larger. The following chart illustrates how both primary OEMs have seen demand for their larger models grow. The chart lists the in-service models used for passenger service. Growth in aircraft capacity suggests that the 488 existing passenger turboprops will be replaced by the larger models. Where are the markets that ATR and Bombardier should focus on? In the following table, we lay out the active fleet of aircraft from those OEMs no longer in the business, plus the market shares of the two current OEMs. The final two columns show what could happen if the replacement is split per market share. The likelihood that the future orders will break down this way is speculative. However, it does provide a sense of how close the competition is. There are several factors that could impact these orders. For example, if airlines like 50 seat capacity, Bombardiers Q400 Combi or the ATR42 could win orders. ATR has a lower priced aircraft and airlines might be swayed by capital costs. Almost certainly the outcome will be a combination of these and other issues. Next, we want to show a chart operators might want to consider when making their selection. Turboprops frequently serve airports lacking paved runways. These aircraft work in harsh conditions and take a beating. Being able to operate a robust aircraft is a crucial factor for many operators – especially in developing countries. As the chart demonstrates the Q400, though having a list price 19% higher than the ATR72, may not be the more expensive aircraft over its lifespan. ATRs retire sooner than Q400s; 94% of the Q400s delivered are in service compared to 76% at ATR. In fact, the most recent maximum used market price of these aircraft is within 3% of each other. This may indicate that Bombardier prices aggressively to meet ATR when making sales pitches. Either way, we beleive airlines (and lessors) have a market of 845 identifiable aircraft of 20 years and older to replace. If you look at the whole market, as the next chart illustrates, only 41% of the active fleet is under a decade old. The future looks good for the turboprop market, and at current delivery rates, offers over 20 years of production.

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